What are Income Tax Estimates?Form 1040-ES

Quarterly income tax estimates are payments designed to fulfill the “Pay as you go” concept of the US tax system. They are similar to withholdings that employees pay from each payroll. Who pays these estimates? Generally, estimates are paid by taxpayers that have sources of income that are either unearned (interest and dividends) or are earned in a manner other than as an employee (self-employment income). It is their primary means to be sure that certain minimum tax deposit requirements are satisfied throughout each year.

Who pays these estimates?

Generally, estimates are paid by taxpayers that have sources of income that are either unearned (interest and dividends) or are earned in a manner other than as an employee (self-employment income). It is their primary means to be sure that certain minimum tax deposit requirements are satisfied throughout each year.

How do I know if I should pay estimates?

Hopefully, your CPA will advise you of this need by performing the calculations and preparing the estimate coupons and instructions in connection with your annual income tax preparation process. If not, you can have some indication that you should pay estimates if you owe more than $1,000 with your tax return (State number vary by State).

Now for the meat of the topic.

The answer you really want to know, Do I really have to pay these? Well, you will love this… No, you do not have to pay Income Tax Estimates. You can continue to pay all of your tax balances with your tax return each year. That is still your choice. But please beware. There are consequences to that decision. If you do not reach certain minimum tax deposit levels, either through equal quarterly income tax deposits or through payroll withholdings, you will likely suffer penalties and interest on the amounts that you owe. One key alternative to the quarterly payment is to increase the level of payroll withholdings such that they cover not only the withholding level previously set but also the additional amount needed to satisfy the calculated Income Tax Estimates. This is another example where a well planned and prepared W-4 (and/or state equivalent) can improve your finances throughout the year as well as at year end. For more information on W-4s see“Updating W-4 Forms – Avoid an Unpleasant Surprise”

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes
http://www.irs.gov/pub/irs-pdf/f1040es.pdf